AGL Media Group’s J. Sharpe Smith toured the headquarters of Vertical Bridge, in Boca Raton, Florida and discussed the important issues facing the wireless infrastructure industry with Alex Gellman, CEO and co-founder, and Bernard Borghei, senior VP, operations and co-founder.
What new opportunities do you envision for wireless infrastructure?
Gellman: Verizon and AT&T are very rapidly moving to use 5G to deploy low-latency, high-definition personalized video Over The Top (OTT). That’s new. They weren’t talking about that last year. That’s a big shift of video to wireless. They did their bench testing and realized that 5G can provide the speed and low-latency to deliver video over a skinny bundle into homes without a truck roll. It’s so much cheaper and so much better for them as a business model.
So there will be pre-5G roll out of fixed point-to-multipoint delivery of Internet and Video, which will pick up at the end of this year, but will happen mostly in 2018-2019. It will be a bridge to the traditional 5G mobility model, which is set for 2020.
Borghei: We are excited to see what AT&T does with OTT, setting the platform for 5G delivery of video content. We view OTT as an opportunity for our broadcast towers to provide space for anyone that wants to provide fixed wireless services. Verizon should continue getting its arms around its content strategy concerning its acquisition of Aol and Yahoo.
What other events do you expect to affect the wireless infrastructure industry in 2017?
Borghei: It is going to be a transformational year from the megamerger standpoint. The AT&T/Time Warner deal will go through with the new administration. There will be attempts to acquire T-Mobile, which, if successful, would be huge for the industry. Not necessarily negative. We are not nervous about it. As Alex says, a marketplace with four carriers and only two spending money is not as good as a market with three healthy carriers spending money.
Overall, 2017 should be a gradual improvement in leasing over 2016, which saw stronger growth over the second half. Additionally, there are deadlines coming up for DISH to do something with its spectrum.
Gellman: The long term wireless infrastructure demand outlook is good. Even though organic growth has been muted, tower stocks held up because 5G is coming. You are going to need to amend the existing sites, roll out new frequencies and densify the network. All of that is good for towers.
What kind of impact do small cells have on your bottom line?
Gellman: In the area of densification, the carrier spend, which has been pretty muted in the last few years, is coming. We are hitting our projections coming out of the gate but they are pretty modest projections. Over time you will see it grow. So far, small cell buying has been geographically driven based on traffic and traffic projections. The carriers are looking for bulk answers: a single company to give them, for example, 300 small cells in Chicago. That does not lend itself to the sites that we have. As the carriers get more specific on the location of their hotspots and they get comfortable with billboards, they will call us if they have a traffic problem in a certain intersection.
Gellman: Shockingly, small cell site deployment is still driven by RF propagation analysis. There is going to be a shift by the carriers where they do their capital deployment based on traffic, more than RF. It is about the location of the high school. What do your sites look like when school lets out? That’s the peak. I guarantee you they need small cells all around those high schools. Where is the Instagram and Facebook traffic? That’s where the carriers are moving. That’s where our billboards come in. We have a pretty good pipeline, but it should increase by an order of magnitude in the next 12 to 18 months.
How will network virtualization affect Vertical Bridge?
Gellman: Where Digital Bridge and Vertical Bridge are focused is on the physical layer of the network. When people talk about network virtualization, that is really the software and the computerization of the network, but there still needs to be a physical layer to get to the cloud. You need antennas, towers, radios, fiber and data centers. That is what Vertical Bridge focuses on, the physical layer of the network. When AT&T talks about virtualization, I think it is terrific. The more efficient the carriers are, the healthier they are, the better.
Outside of your towers, you now have 40,000 assets that you market for wireless facilities, including rooftops and billboards. What need does this fill for your customers?
Borghei : The densification of the heterogeneous networks will drive the need for different types of assets: urban, suburban and rural. When you have indoor solutions handing off to small cells that hand off to macrocells, that’s where having different types of assets complementing our macrocell network is always going to be key for us. Densification is going to take place on all of these different morphologies. The various types of assets we have accumulated in buildings, rooftops, utility attachments and macrocells –– all are part of a turnkey real estate solution.
Borghei: I take it personally when people call us a tower company. We are no longer a tower company. We are a real estate solution provider. We have all these different types of assets to meet the demands of today’s advanced technology leading into 5G and beyond.
Gellman: We bought a lot of suburban towers with a lot of real estate. If C-RAN is to be located at specific sites, we look at marketing the land under our sites for a C-RAN hub.
October 20, 2016 — Vertical Bridge has announced the closing of $196 million initial principal amount of Series 2016-2 Secured Tower Revenue Notes in a private asset-backed securitization transaction.
The Notes were issued by Vertical Bridge CC and were issued in two classes consisting of $174.2 million initial principal amount of Class A Notes and $21.8 million initial principal amount of Class B Notes. The Notes were priced with an annual yield to expected maturity of 5.25% for the Class A Notes and 7.00% for the Class B Notes. The Notes were rated at the closing by both Morningstar and Kroll. The Notes have an anticipated repayment date of October 2021 and final legal maturity of October 2046.
“This issuance is Vertical Bridge’s second securitization in 2016 and reflects the high quality of the radio broadcast towers we have acquired and the long term stability of cash flows resulting from the mission critical role that tower infrastructure plays in the delivery of media and communications. Together with our founding investors, Digital Bridge, we have been accessing the securitization market for nearly a decade and we anticipate regular ongoing issuances to support the continued growth of our communications infrastructure investments,” said Alex Gellman, CEO and Co-Founder of Vertical Bridge.
The Securities are collateralized by tenant lease payments on a geographically diverse portfolio of 407 radio broadcast tower sites. The proceeds of this offering will be used to fully repay the existing credit facility on these tower sites.
Guggenheim Securities served as Structuring Agent and Bookrunning Manager for the offering.
Vertical Bridge has signed an exclusive five-year agreement with the RMR Group to market, manage and master lease telecom sites at more than 1,000 RMR-managed buildings. Terms of the transaction were not disclosed.
The RMR Group, which invests in real estate and manages real estate related businesses, has a portfolio of managed assets that includes hotels, travel centers, healthcare, senior living and office properties.
“With the RMR portfolio, there are lots of good buildings with lots of good spots for telecom equipment,” Jim McCulloch, VP real estate, Vertical Bridge, told AGL’s eDigest. “The more high quality relationships we have and the more high quality sites we control, the better we are going to look to the carriers.”
The way the deal works is that Vertical Bridge becomes a tenant of the building when it leases a rooftop space to a carrier, which then becomes Vertical Bridge’s tenant. The recurring revenue is then shared between the building owner and Vertical Bridge. The agreement with RMR is subject to certain performance goals after five years. Even if the relationship were to end with RMR, Vertical Bridge would remain as a tenant on the buildings until its contract with the carrier ends.
Vertical Bridge now has more than 40,000 assets that it can lease to carriers but does not own. Four months ago, Vertical Bridge entered into an agreement to manage and market wireless deployment sites at 250 medical office buildings owned by Welltower.
Before that, in September 2015, Vertical Bridge signed an exclusive multi-year agreement with Clear Channel Outdoor Holdings for the management and marketing of wireless deployment on its billboards and other out-of-home assets in 45 top U.S. markets, including 1,200 digital billboards.
In addition to owning cell towers, agreements to market, manage and master lease rooftops and billboards gives Vertical more assets that help it to compete with larger tower companies, according to McCulloch.
Rooftops are favorable locations for macrocells and small cells, while billboards are mostly likely to be leased for small cells or for the Internet of Things. In general, these sites help Vertical Bridge serve carriers that want to densify their networks.
“Vertical Bridge still responds to search ring requests from the carriers for macrocell placement, but for small cells or IoT, the carriers are more market driven, and we might present them with 20 sites in a given market,” McCulloch said.
Vertical Bridge’s portfolio now stands at over 45,000 owned and/or managed sites including tower, rooftop, billboard, utility attachments and other site locations across the United States. Expect more to come.
May 5, 2016 — Vertical Bridge has acquired 275 sites and secured a build to suit arrangement for new towers from Alaska Wireless Network (AWN), the wholly owned subsidiary of wireless carrier General Communications, Inc. for $91 million. The transaction is valued at approximately 20 times tower cash flow and is expected to close in mid-2016.
AWN will be an on-going tenant on all of the sites in this sale-leaseback transaction. The majority of the towers are fiber ready and are expected to be upgraded from 3G to LTE.
The towers cover Anchorage, Fairbanks, Juneau, Ketchikan, Kodiak Island, Wasilla and the Kenai Peninsula, which includes 90 percent of the Alaska population. Coverage also includes the corridors between the population centers.
On nearly 80 percent of the sites, AWN is the only tenant, leaving significant upside for a second and third tenant on each site. In the next five years, Vertical Bridge expects to serve all the major carriers.
“We think these towers will be very attractive to the big four as they think about network expansion and densification,” said Bob Paige, senior vice president of mergers and acquisitions, Vertical Bridge.
Verizon has built out in Fairbanks, Anchorage and Matanuska-Susitna Borough, which includes Wasilla. “We think Verizon will be one of our best partners in the long term,” Paige said. “They have done a pretty good job of building out, but there are still a lot of gaps in coverage given the vast territory.”
“AT&T’s presence is pretty modest in Alaska, and T-Mobile has stated they want a bigger presence, as well as Sprint,” he added.
While Alaska is a vast state, Vertical Bridge’s newly purchased tower portfolio is dense, according to Paige. For example, it has 76 sites in Anchorage, 26 sites in Wasilla and 30 sites in Fairbanks.
“When AT&T decides to make a meaningful entry into the market, it only has to make one phone call to Vertical Bridge to complete a lot of its network buildout,” Paige said. “That was one of the appeals to working with AWN.”
Global Tower Partners, from which many of the Vertical Bridge principals originated, had a significant portfolio in Alaska and a lot of experience in the state. Even though the price was a consideration, Paige believes that Vertical Bridge won the bidding process because of its experience in the state and in working with sale-leaseback partners.
“We own the towers; they own the network. It is a marriage. We need each other to coexist,” he said. “They wanted to make sure they were hitching their wagon to someone they can work with in the foreseeable future, and we know how to get things done in Alaska.”
April 26, 2016 — T-Mobile’s Allan Tantillo proposed and Vertical Bridge’s Mike Belski agreed that the current system of tower rent escalators and other amendment-related price increases will need to change in the future, during a panel at the Inaugural Wireless West Conference (WWC), held last week, in Anaheim.
WWC was presented by five state wireless associations, representing California, Arizona, Nevada, Colorado and the Northwest. AGL Media Group assisted with programming and the moderating of the panels at the two-day conference.
During the panel, “The New Economics of Wireless Infrastructure,” which was moderated by Pat Troxell-Tant, Solution Seven, industry experts agreed that the state of the wireless infrastructure industry is healthy, but it will have to adjust to the carriers’ dramatically changing economics.
The cost of spectrum is one of the factors that have changed the economics of wireless infrastructure, according Clayton Funk, managing director, MVP Capital. The AWS-3 auction brought a whopping $45 billion in bids in 2015, and this year the 600 MHz Broadcast Incentive Auction is estimated to bring either $25 billion to $30 billion, according to JP Morgan, or $60 billion to $80 billion, according to Kagan Media Appraisals.
“Because it has gotten so expensive to buy spectrum, the carriers have to become more creative in making their spectrum use more efficient, such as network densification and MIMO,” Funk said.
Other factors in carrier economics are infrastructure build out costs, which globally between 3G and 4G were $700 billion, and falling revenue growth.
“The model of spending significant capex dollars and not getting the same return on their investment doesn’t work,” Funk said. “Whatever 5G becomes, carriers will need to make it more profitable.”
As new technologies roll out, carriers will look for ways to use spectrum more efficiently, according to Tantillo, but carriers’ cost cutting will also extend to current macrocell infrastructure as their economic model shifts. As the carriers attempt to drive down the costs, especially in tower rent, tower companies will need to reevaluate their prices if they want the carriers’ business, he said.
“It is incumbent upon those tower operators that are seeing their business threatened to adapt to new ways to do business and to find more efficient ways to serve us,” he said. “We want to go on to those old macrosites, but maybe their model needs to change. Maybe that can’t come and say, ‘Every time you add a TMA [tower mounted amplifier] on a tower it is a $150 a month increase in your rent.’”
Tantillo believes that competition among the tower companies will drive down the prices for rent and escalators, as well as amendments.
“Who wants to keep my lease? Can I put it out to auction?” he asked. “There are some very aggressive tower companies out there that are looking to be fantastic partners with us.”
Tantillo wasn’t talking chump change, either. He spoke of offers to cut leases from $3,000 to $1,500 a month and to lower escalators from 3.5 percent to 2 percent.
“They are saying, ‘give us your list of sites, and we will make it worth your while,’” he said. “We will work with you today so that when the lease expires, we will be ready for you to go on to our site and we will lower the cost curve for you.”
Mike Belski, senior vice president of leasing and marketing, Vertical Bridge, acknowledged that some leases had become unsustainable after escalating for an extended period of time, and he pledged to work with the carriers to develop a new business model.
“So the challenge for us is the paradigm shift. We have to think about leasing differently. We never thought we would add so much equipment to these towers. Vertical Bridge wants to be a part of the solution and not part of the problem,” he said.
Carriers will aggressively take advantage of opportunities to lower their tower costs and tower companies will feel direct pressure, Tantillo said.
“The challenge to the major tower companies that have most of the tower portfolios is, do you want to lose $3,000 and possibly future business or give me a deal that makes me want to stay there,” he said. “Tower companies are going to be faced with some pressure to bring their cost structures in line.”